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The U.S. wireless industry is looking to invest $275 billion in 5G networks over the next 7 years. Therefore, wi-fi, telecom and cable contractors whose work involves building out the physical infrastructure have an unprecedented opportunity to increase their revenue. To take on these projects, contractors need working capital that allows them to buy inventory and equipment upfront or before they get paid, which, depending on the project, can take a long time. Telecom finance can be used to help contractors get the funds they need to meet expenses as they arise.
Telecom funding options include factoring, secured and unsecured debt, bridge loans, project finance and export credit agency transactions. This article will focus on secured lending based on the value of company’s assets (asset-based lending) and factoring. For differences between the two, please see our asset-based lending page. For an example of a hybrid arrangement, please see our Accounts Receivable (A/R) Factoring page.
For telecom contractors that want to use receivables as collateral or for factoring purposes, putting forth straightforward net terms and billing the clients by day, hour, week or work tickets works best. Progress or contingency billing, on the other hand, makes the process more difficult because invoices created under either are easier to contest.
For example, let’s say a business is helping a major carrier build a $10 million wired Internet access distribution network in Virginia over the course of a year. In six months, the business, by its own estimations, completes 50% of the project. It bills the client for $5 million but the client disputes the invoice because it reckons that the project is only 45% completed or because it is not happy with the quality of the work. Disputes like this can take a long time to be resolved and may result in a lower-than-expected payment to the contractor. To factor such an invoice or use it as collateral for an asset-based facility, working capital providers might need to obtain a letter from the client stating that: a) they inspected the work, b) it is of acceptable quality and c) the invoice would be paid in full. This creates an unnecessary challenge to receiving crucial working capital quickly.
With contingency billing, payment to the subcontractor is only made if and when the general contractor is paid. The disadvantage of this method is that if a project hits a roadblock – such as a regulatory hurdle – the subcontractor will not get paid until the hurdle is resolved.
Telecom factoring allows companies to sell accounts receivable at a discount to a third-party company, known as a factoring company or, simply, a factor. The receivables can also be purchased by a bank. Using factoring, invoices can be monetized in 2 to 3 days.
The factoring company assumes the responsibility of collecting payments on the invoices it factors – either on a permanent or temporary basis – and keeps a small percentage of the total invoice amount as their fee. A factoring company can buy just a few of your invoices, known as spot factoring, or all of them, known as whole ledger or full-turn factoring. To learn about the cost of factoring, please visit our Small Business Factoring page.
Factoring works in four simple steps:
- The business provides a factor with a copy of the invoice that was sent to the client
- The factor verifies the invoice and runs a credit check on the client
- The factor advances a portion of the outstanding amount
- Once the invoice is paid, the business gets the remainder minus the discount rate and any additional fees
Here is an example of a factoring arrangement:
- Invoice amount: $500,000
- Advance rate: 95%
- Reserve: $25,000
- Fees: Monthly fee of 3%, lockbox fee of $1,500
- Type of arrangement: Non-recourse
In the example above, a Canadian contractor was deploying a broadband and cable project for a major local carrier. The carrier had 90 days to pay but the contractor needed cash to make payroll and afford fuel for trucks and service vehicles. The contractor factored the invoice paying a one-time lockbox fee of $1,500 and $15,000 a month until the invoice was collected. Once the invoice is paid, the factor pays back the reserve, minus certain fees. Because the arrangement is non-recourse, there is no chargeback to the client even if the invoice does not get paid.
Fees are not uniform across the factoring industry. They depend on the type of arrangement, the credit profile of a company’s customers, dollar amount and the number of invoices that are being factored, etc.
Asset-based lending (ABL) is another financing option that utilizes accounts receivables. For this type of lending, funds are extended based on the value of a company’s most liquid assets, such as accounts receivable and inventory. The amount advanced cannot exceed the so-called “borrowing base” which is the value of the eligible assets minus a discount determined by the lender. The base is recalculated periodically to ensure compliance and determine how much can be drawn.
ABL financing can come in the form of:
- A loan. A loan allows the business to only borrow once.
- A revolving credit facility, also known as a revolver. Amounts available under a revolver can be reused after they are paid down.
The advance rate varies by the type of asset and tends to be higher on accounts receivable and lower on inventory. For more information, please see our Accounts Receivable Factoring page.
For an example of a borrowing base calculation and loan terms, please refer to our asset-based lending page</>.
Requirements for an asset-based loan vary by lender. As explained on our asset-based lending page, financing companies usually require that a company be in business for at least 6 months and have at least $1 million of eligible assets.
Some working capital providers care about a business’s or the business owner’s credit score. However, the most important qualifier for an asset-based loan is that the receivables are not pledged as collateral for another facility or that the company in general does not have any liens or major judgments that can encumber its receivables and make it challenging for a lender to recover its collateral, if needed. Unpaid taxes, in particular, can cause issues for a lender because the IRS can attach a lien to the company’s assets and make it difficult to secure asset-based financing. If the receivables serve as collateral for another loan, the financing company could take a subordinated position.
As with asset-based lending, requirements for factoring receivables vary by company. In addition to a completed application, factors may ask for articles of organization or incorporation and an account receivable aging report, which are described in more detail on our asset-based lending page. For telecom companies, factors may also ask to see a copy of the contract or other document that details the work assignment. It is crucial that the contractor is current on its workers’ compensation insurance to ensure the invoice will be paid.
Contact Business Factors & Finance today to find the best financing option for your business.